The members of the Guy Carpenter Global Reinsurance Composite (GCGRC) saw their total net income more than double to almost $10 billion thanks to strong underwriting results and a substantial recovery in asset values.

Shareholders’ equity for the composite rose by 17 percent to reach almost the same level seen at the end of 2007 before the financial crisis took its full effect.

Earnings were much stronger. The members of the GCGRC saw their combined ratios drop to 91.3 percent for the first nine months of 2009 from 97.5 percent in the same period in 2008, thanks to a quiet US hurricane season - although it must be noted that Winter Storm Klaus, flood and hail in Central Europe, brush fires in Australia and an earthquake in Italy still took their toll on balance sheets.

The lower level of catastrophe activity was significant, particularly for the smaller property specialist companies in the GCGRC. The GCGRC’s combined ratio also benefited from favorable loss reserve development or a reduced amount of adverse loss reserve development from the level reported by most of the insurers in the 2008 nine month period.

The improvement in investment results following a poor first quarter has made many companies guardedly optimistic about the future long-term investment outlook. The overall realized investment loss was somewhat affected by portfolio restructuring at Swiss Re, which had its own well-reported troubles in the final months of 2008.

Excluding Swiss Re’s portfolio restructuring, the total investment result showed a $1.3 billion gain. Including Swiss Re’s result, the investment result showed a $1.0 billion loss. Over the course of the first nine months of the year, total net income rose by 155 percent to $9.7 billion and the annualized return on equity rose from 7.45 percent to 13.1 percent.

The improved underwriting result and a rally in the investment markets were the main drivers of the 17 percent increase in shareholders’ equity of the composite since year-end 2008. Shareholders’ equity at September 30, 2009 has recovered to approximately the same level reported by the GCGRC at December 31, 2007, before substantial share buy-backs in the first half of 2008 and the credit crisis induced investment losses recorded in the second half of that year. The recovery in aggregated shareholders’ equity was broadly based, but uneven; two of the three companies not exceeding their year-end 2007 levels, Swiss Re and Munich Re, were the GCGRC’s largest entities.

The GCGRC reflects only one group having a material capital raise during the period, but the size of that issuance is clearly evident in the composite figures: a CHF3.0 billion ($2.9 billion) perpetual convertible capital instrument issued by Swiss Re to Berkshire Hathaway during the first quarter of 2009. Validus also raised capital during the period by issuing common shares in conjunction with its buyout of Bermudian rival IPC Holdings, although that share issuance had limited impact on the GCGRC’s figures.

Because of the fact that only two companies raised capital over the course of the year, it is fair to say that most of the GCGRC companies consider themselves to be well capitalized for 2010.

Delving deeper into the balance sheet, several companies de-risked their investment portfolios during the nine month period by shrinking equity holdings or shortening fixed income portfolio durations with most companies now inside four years. One of the biggest examples of de-risking came from one insurer. After materially increasing its equity portfolio, it sought protection from a broad market downturn by using a hedge comprised of equity index total return swaps in the third quarter of the year.

Many share buyback programs were put on hold during the credit crisis, but the recent turnaround in the economic situation and the continuing competitive market for many lines of business, particularly commercial casualty, has persuaded management to consider reinstituting them or even upping their authorization limits. Most future buy-back programs, however, will be done opportunistically as the GCGRC’s share prices have begun to recover, thereby reducing or erasing some of the steep discounts from book values seen in the first half of the year.